Understanding microfinance and its advantages to developing countries

Women from rural areas, households with low-income, and the tiny businesses they own are often left starving when it comes to finances. The majority of formal financial institutions see these groups as both high risk and high cost since most of their transactions are small, and these clients often reside in remote locations.

But in recent years, microfinance has helped break down these financial barriers. This banking service has helped plenty of low-income households to stabilize their income flow and save for the future. But what exactly is microfinance? Let us find out.

What is microfinance?

According to Investopedia, microfinance is a type of banking service that provides for low-income or unemployed groups or individuals who do not have any other access to financial services. Lending is primarily the type of service institutions involved in microlending offer. However, there are plenty of banks that also provide micro-insurance-products and business education.

Most microfinancing operations are located in third-world countries such as Indonesia, Uganda, and Serbia, as microfinance aims to help impoverished communities become self-sufficient. The concept being in existence since the 18th century, microfinancing has shaped plenty of microfinance entrepreneurs all over the world.

Despite the plenty of heart-warming success stories involving microfinancing, it does come with criticisms. For one, it has been criticized for making money off poor people. There are many organizations involved in microfinancing that were nonprofit but turned into profit organizations later on. Nonetheless, it is undeniable that there are plenty of benefits given by microfinancing.

Here are some of them.

Allow people to provide better for their families

Microfinance has helped many households in abject poverty (forced to live off on $2 or less per day) develop resiliency. Even when a household could work its way out of poverty, problems such as healthcare could send it right back into destitution. But with the help of microfinancing, individuals can put up a business opportunity that could help them during economic difficulties.

Give access to credit

The majority of banks do not extend a loan to an individual who has no credit or collateral. Doing so is risky and could cause potential harm to the financial institution. Unfortunately, though, people living in poverty do not have any credit or collateral. By extending microfinance opportunities, though, even poor people will now have access to credit, with the information handled by reputable credit data providers.

Serves those often overlooked by society

In developing countries, the primary recipient of microloans is women. About 85 percent of loan products extended by microfinance institutions are given to women. Nonetheless, unemployed individuals with disabilities and those simply who are destitute are recipients of microfinance products to help alleviate their condition and take control of their lives.

Offer a better overall loan repayment rate

People who feel empowered are less likely to default payment on a loan. Since statistics have shown that women are more likely to repay a loan than men, the former has been a consistent recipient of microloans. Also, for many who receive microloans, it is their only real chance of escaping poverty. Thus, they are unlikely to mess it up.

Encourage people to save

Apart from microloans, saving money is also an important component of microfinance. When people can meet their basic needs, the natural inclination is to save the remaining money for emergency purposes. This helps create investment potentials and eventually increased income for those living in the developing regions.

Reduces stress

Although microloans are intended to open up a business, the reality is, some of this money goes to cover household expenses. And that is actually alright since it still serves its purpose of reducing stress. Stress goes hand in hand with poverty, and if often leads to unhealthy coping mechanisms. But with the help of microloans, worries of an impoverished household is somehow reduced.

Makes people feel significant

Receiving credit for the first time makes you feel you matter. Such feelings cannot be ignored. It is a milestone for everyone, even for those living in the developed world. Having a financial institution trust you enough to hand you a credit makes you want to thrive. It is undeniable that credit from microloans helps change people’s perspectives. Now, it is more than just surviving day-by-day.

Offers substantial economic gain

Participating in microfinance programs opens up access to better nutrition, increased level of consumption, and consumption smoothing. As recipients of microloans spend their money, the benefits of microfinancing extend to those who did not even participate as it means increased cash flow in the local economy.

For many years now, microfinance has undeniably been a lifeline for many impoverished families and individuals. But to avail of its benefits, you need to qualify for certain criteria. Find out more about your credit score from credit data providers.